In an analysis of the proposals to cut tax credit entitlements as part of a £12bn welfare savings plan, the cross-party work and pensions select committee said measures to mitigate the reductions, such as the introduction of a National Living Wage, would be "dwarfed" by the cuts.
In his summer Budget, George Osborne announced a four-year freeze in tax credits, and a cut in the level of earnings at which tax credits start to be withdrawn, from £6,420 to £3,850, from next April. However, after the proposals were vetoed by the House of Lords last month, the chancellor has said he will revisit the plans in the forthcoming Spending Review.
In today’s A reconsideration of tax credit cuts report, the MPs found that a single earner with two children working 35 hours will increase their net income by £323 pounds a year under the National Living Wage, but will lose £1,701 in tax credit cuts, leaving the family £1,378 worse off overall.
Only about one-third of those affected by the tax credit cuts would anyway benefit from the increase in the National Living Wage, even by the time of its full implementation in 2020/21. Average losses would be around £1,500 in real terms.
Publishing the report, chair Frank Field said no one has been able to provide the committee with a satisfactory series of mitigating policies to combat the impact of cuts in tax credits next year.
“My advice to the chancellor would be to pause and use the next 18 months to bring forward a major overhaul to abolish tax credits as we know them,” he added.
“A new system could come in fully by 2020 when the chancellor’s National Living Wage will be paying a wage of £16,000 per year. This would allow him to question whether a reformed tax credit system shouldn’t be re-modelled to help only lower earning families with children."
The committee also warned that increasing the rates at which benefits are removed from recipients of the Universal Credit to reverse the tax credit plan would only shift the burden of cuts to different low income families and further undermine the objective of making work pay.
Field called on the Treasury to provide better data about the effects of its summer Budget measures, with more information able to inform effective policymaking.
Responding to the report, a Treasury spokeswoman said the report was out of date.
“The chancellor has already made clear that the government will listen about how we make a transition to the higher wage, lower tax and lower welfare economy he wants to see, and will announce proposals on how we do that at the autumn statement.
“So this report is out of date. Like other analyses, the examples cited here don’t consider other measures the Government has introduced or is introducing to support working families, such as the free childcare that will be worth £5,000 a year per child, freezes in council tax and fuel duty throughout the last Parliament, higher public spending on the NHS and schools, or the upward pressure on wages up the income scale that we are already starting to see thanks to the new National Living Wage.”
